China Auto Profit Margin Hits Decade Low of 1.5% in H1 2026

On July 13, Chen Shihua, deputy secretary-general of CAAM, said at the China Automotive High-Quality Development Summit that the average profit margin of China’s vehicle manufacturing sector fell to 1.5% in the first half of 2026.

This represents the lowest level in nearly a decade, highlighting an industry increasingly characterized by rising output without corresponding profit growth.

CAAM data show that vehicle manufacturing margins have been declining for several years. The sector posted a profit margin of 5% in 2023, which fell to 4.3% in 2024 and further eased to 4.1% in 2025.

The decline accelerated in 2026. The industry’s average profit margin stood at 3.2% in Q1 before dropping by more than half to 1.5% in H1, well below the 6.1% average profit margin recorded by China’s industrial enterprises above designated size.

At that profitability level, a new vehicle priced at RMB 200,000 ($29,500) generates a net profit of only about RMB 3,000 ($442) for the manufacturer—less than the hardware cost of a single traction battery pack.

Chen said intensifying market competition has been the primary driver behind shrinking profitability.

Passenger vehicle retail sales in China declined by more than 20% year-on-year in the first half of 2026, while new model launches and production capacity continued to expand.

Facing fiercer competition in a mature market, automakers have relied heavily on price cuts, trade-in subsidies, financing incentives and complimentary options to defend market share, further compressing vehicle gross margins.

At the same time, rising upstream costs have begun feeding through to automakers, adding further pressure on profitability.

Prices for lithium carbonate, copper, aluminum and automotive-grade memory chips have rebounded since last year and have increasingly filtered through to vehicle manufacturing in 2026.

Battery and semiconductor costs alone have increased production costs by roughly RMB 4,000 ($590) to RMB 14,000 ($2,065) per vehicle.

Automakers are also burdened by sustained investment. Leading manufacturers now spend tens of billions of yuan annually on research and development, while overseas expansion, factory construction and depreciation of fixed assets continue to weigh on earnings.

Supply-demand imbalance has also undermined profitability.

China’s vehicle production capacity now exceeds 40 million units annually, while domestic demand is below 22 million vehicles, leaving average capacity utilization below 70%.

Large volumes of idle production capacity have pushed up unit manufacturing costs, while a growing share of industry profits has shifted upstream to suppliers of batteries, semiconductors and intelligent driving technologies.

Chen noted that the industry’s profit distribution is undergoing structural change.

Whereas profits were previously concentrated among traditional component suppliers and dealerships, value is now increasingly captured by technology suppliers specializing in batteries, chips and advanced driver assistance systems.

At the downstream end, the rise of online marketing has redirected advertising budgets toward digital media platforms and content channels, further squeezing the profitability of traditional 4S dealerships.

Currently, only a handful of leading Chinese automakers, including BYD and Geely, are able to maintain profit margins of roughly 2% to 4% through economies of scale and vertical integration.

Most traditional joint-venture automakers and second-tier new energy vehicle brands remain close to breakeven, while many EV startups continue to operate at a loss.